IBEX Ltd Q1 FY2024 Earnings Call

Welcome to the IBEX First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. To note, there is an accompanying earnings deck presentation available on the IBEX Investor Relations website at investors.ibex.co. I will now turn this conference over to Mr. Michael Darwal, Deputy CFO and Investor Relations of IBEX. Please go ahead.

Good afternoon, and thank you for joining us today. Before we begin, I want to remind you that matters discussed on today’s call may include forward-looking statements related to our operating performance, financial goals, and business outlook, which are based on management’s current beliefs and assumptions. Please note that these forward-looking statements reflect our opinion as of the date of this call, and we undertake no obligation to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on September 13, 2023. As a reminder, as of July 1, 2023, we became a domestic filer and are reporting on a U.S. GAAP basis rather than from the previous IFRS standard. With that, I will now turn the call over to Bob Dechant, CEO of IBEX.

Thank you, Mike. Good afternoon, everyone, and thank you all for joining us today as we share our first-quarter fiscal 2024 results. I’m extremely proud of how well our business continues to perform. In the quarter, we delivered on our key objectives while achieving the high end of our revenue guidance and coming in line with our EBITDA margin guidance. More importantly, IBEX continues to consistently execute, capitalize on market opportunities, and strengthen our position. Q1 FY 2024 is our seventh consecutive quarter of year-over-year adjusted EBITDA growth and our fifth straight quarter of year-over-year adjusted EBITDA margin improvement, driven by continued growth of our high-margin services and geographies. Revenues for the quarter were $124.6 million as we continue to migrate portions of our onshore business to higher-margin offshore and nearshore regions. Adjusted EBITDA increased 6% year-on-year to $13.7 million, up 90 basis points to 11%, while adjusted net income improved to $7.6 million from $6.8 million in the quarter, and adjusted EPS increased to $0.40 from $0.36 the prior year. We generated $6.6 million in free cash flow, more than tripling from the prior year quarter, finishing the quarter with an outstanding balance sheet that is debt-free and with a net cash position of $61.1 million. Our conversion rate of adjusted EBITDA to free cash flow was nearly 50%. We believe that our consistent trajectory of margin improvement and maintaining an outstanding balance sheet and our ability to generate strong free cash flow puts us in an enviable competitive position. From an overall client and sales standpoint, our pipeline is resuming its pace of wins and deal flow. Our growth has been fueled historically by our powerful new logo engine, and fiscal 2024 is off to a fast start. We began the first quarter with four impressive new client wins across key verticals, including healthcare and financial services, and that carried into Q2. I’m excited to report that we have won two blue-chip Fortune 100 brands, one in the automotive transportation vertical and one with a very large retail brand in highly competitive deals. Both are launching in late Q2. Our competitive advantage continues to be centered around our BPO 2.0 capabilities, and now more recently, in our ability to bring advanced AI-based technology to our solution. Of these two wins, one is in our nearshore Jamaica region and the other in our provincial Philippines geography, demonstrating our ability to win in all the diverse markets we serve. We expect these two clients to scale in the second half of FY 2024. Additionally, IBEX continues to expand its higher-margin integrated omnichannel and digital-first support, which is now 77% of our overall business, up from 71% a year ago. With these new wins and our strong pipeline, we remain confident in our brand and our ability to win transformative new business throughout the fiscal year. Operationally, we continue to execute well for our clients across all geographies and consistently outperform our competition. Our ability to not only land new clients but to expand with them is a strong proof point of our ability to operationally deliver. As a data point, today, for our top 25 clients, we operate on average in nearly 2.5 distinct geographies for them. We typically start with a client in one geography and then we grow with them in new regions based on our strong performance. We view this as a proxy for being a trusted partner to our clients and our ability to deliver exceptional customer experiences in all our operating regions. Now, last quarter, I discussed our three access strategy for deploying AI for our clients to improve performance and the customer experience. The first access is focused on the frontline agent, where we have been deploying generative AI to make the agent more productive as part of our Wave X toolset. The second is where we use AI in our deep analytics and business intelligence offering, enabling us to provide better, more actionable insights into the customer. The third is where we deploy generative AI to automate contacts with solutions such as voicebots and chatbots. This third prong is a further evolution of our digital transformation where we have been working with our clients moving from voice calls to digital contacts such as chat and SMS. We are now building solutions where the digital-first experience can start with digital automation, which we see as an even higher-margin service. This is why we are bullish on generative AI, and we see this as more opportunity than risk. I want to highlight that we are using our speed and our tech strength to quickly move into these opportunities. We now have over 15 opportunities in our pipeline with both existing and new clients. These solutions are helping us win new clients. As an example, one of the key differentiators in our recent automotive transportation client win I referenced earlier was our unique ability to demonstrate and deliver an AI-powered smart IVR solution to digitally transform their customer experience. We leveraged our new Genesis platform and generative AI to build a solution that also includes conversational voice and chatbots, creating a seamless CX solution from an AI agent to a live agent. We see this as the next generation of integrated omnichannel and the next wave of Wave X. We believe solutions like this will continue the growth of our higher-margin digital-first services. From a capital allocation standpoint, we are successfully executing on our share buyback program given the current valuation and the confidence in the trajectory of IBEX. Since we announced the program, we have acquired more than 400,000 shares back. We see this as a very attractive use of our growing capital. Additionally, we are actively exploring new markets for client expansion. Our strong balance sheet puts us in a great position to expand our geographical footprint and analyze market by market whether to expand organically or to look for a small tuck-in acquisition. Finally, our debt-free environment and our overall structure are enabling us to generate strong free cash flow, allowing us to put our capital to constructive use and make targeted investments for growth. In closing, my team and I are focused on the continued strengthening of the business and driving value for our employees, clients, and our shareholders. I will now turn the call over to Taylor to go through our financial results and guidance.

Thank you, Bob, and good afternoon, everyone. Thank you for joining the call today. In my discussions of our first-quarter fiscal year 2024 financial results, references to revenue, net income, and net cash generated from operations are on a U.S. GAAP basis, while adjusted net income, adjusted earnings per share, adjusted EBITDA, and free cash flow are on a non-GAAP basis. Reconciliations of our U.S. GAAP to non-GAAP measures are included in the tables attached to our earnings press release. We had a strong quarter, representing a solid start to our fiscal year in terms of profitability and free cash flow as our clients continued migrating to lower-cost offshore regions and we absorbed the impact of a changing business environment for several of our FinTech clients, revenue declined 2.5% to $124.6 million compared to $127.8 million in the prior year quarter. Revenue mix continues to trend towards higher margin services and geographies, digital and omnichannel delivery now represents 77% of our total revenue, versus 71% in the first quarter a year ago while our offshore and nearshore revenues now comprise 75% of total revenue versus 70% in the prior year quarter. Looking at revenue in total, the shift in geo mix and decline in the FinTech vertical were largely offset by growth in our strategic HealthTech and retail verticals. Net income increased to $7.4 million versus $6.5 million in the prior year quarter. The increase in net income was primarily driven by stronger operating results and higher interest income versus interest expense in the prior year quarter, partially offset by higher tax expense. EPS increased to $0.39 compared to $0.35 in the prior year quarter. We expect our annual effective tax rate to be approximately 20% for the year on a normalized basis. On a non-GAAP basis, adjusted net income increased to $7.6 million compared to $6.8 million in the prior year quarter. Non-GAAP fully diluted adjusted earnings per share increased to $0.40 compared to $0.36 in the prior year quarter. Adjusted EBITDA increased to $13.7 million or 11% of revenue compared to $12.9 million or 10.1% of revenue for the same period last year. The increase in adjusted EBITDA margin was primarily driven by stronger operating results from an increased mix of higher-margin offshore and nearshore delivery, higher capacity utilization, and an increased mix of digital and omnichannel delivery. Partially offsetting these operational benefits were higher SG&A expenses for investments in sales, marketing, IT, infrastructure, and increased compliance expenses to support our growing business. For the first quarter of fiscal year 2024, our top five and top 10 client concentrations remained largely flat at 40% and 59%, respectively, of overall revenue. Our client base remains stable as yet one new client entered our top 10 client list. We have worked hard to diversify our client base over the last several years and are proud of the progress we have made. Switching to our verticals: retail and e-commerce increased to 23.4% of first quarter revenue versus 21.3% in the prior year quarter. HealthTech increased to 11.9% of first quarter revenue versus 10.2% in the prior year quarter; and travel, transportation, and logistics increased to 13.5% of first quarter revenue versus 13% in the prior year quarter. Conversely, our exposure to telecommunications vertical decreased to 16.8% of quarterly revenue versus 17.3% in the prior year quarter. Additionally, FinTech decreased to 14.8% of revenue for the quarter versus 19.9% in the prior year quarter, impacted by the changing landscape for crypto and new economy investment platform plans. Net cash generated from operations increased to $8.7 million for the quarter compared to $5.6 million in the prior year quarter, primarily due to stronger operating results. Our DSOs were 67 days, up four days sequentially. Several larger client payments were received shortly after the quarter ended and negatively impacted our DSOs at the end of the first quarter. Despite this, we continue to be below the industry average. Capital expenditures were $2.1 million or 1.6% of revenue in the first quarter of fiscal year 2024 versus $3.6 million or 2.8% of revenue in the prior year quarter, and we continue to utilize our available capacity following the buildouts completed during the pandemic. The investment we did make in CapEx in the quarter was used predominantly for seat utilization of previously built-out capacity. Free cash flow increased to $6.6 million in the current quarter compared to $2.0 million in the prior year quarter as we converted nearly half of adjusted EBITDA to free cash flow. This is the highest level of free cash flow IBEX has generated in the first quarter of our fiscal year. We ended the first quarter with $62 million in cash, up from $57.4 million as of June 2023, mostly driven by strong cash conversion of operating profits during the quarter. Net cash improved to $61.1 million from $56.4 million as of June 2023. The borrowing availability under our revolving credit facilities increased to $72.6 million at September 2023 compared to $71.9 million as of June 2022. During the quarter on September 18, we announced a share repurchase program authorizing up to repurchase up to $30 million worth of shares. In the first quarter, we repurchased 134,000 shares for $2 million for fiscal year-to-date through November 8; we have repurchased over 400,000 shares. Looking forward to the remainder of 2024, we're confident in the resiliency of our business, supported by the client diversification and strategic vertical expansions we built over the preceding years. As a result of our strong start to the year, we remain confident in our execution, which is reinforced by our reiteration of prior guidance and our share repurchase program. We believe our recent client wins and strength of our pipeline will return us to growth later in the year and position us well as we head into fiscal year 2025. I joined IBEX as I was excited about the diversity of clients convertible markets we serve, the strong balance sheet and positive cash flow, strength of our management team and employees and our ability to win market share to grow our business. As I have now been here for almost three months, I can say that I have not been disappointed in any of the assumptions I made about IBEX prior to joining the team. I'm certainly excited about our future and where we're headed. With that, Bob, I'll now take questions. Operator, please open the line.

Thank you. Our first question comes from the line of Tobey Sommer of Truist. Your line is open.

Thanks. I was wondering if you could describe what you're hearing from customers and your conversations with them about calendar 2024 growth expectations in their businesses and the implications for IBEX next year?

Yes. Thanks for the question, Tobey, and I appreciate you joining the call. Our clients give us pretty good visibility to their business and their forecasts six months out; they'll give directional views past that. If you look at the whole of them, they're still trying to figure that out. You have some that are winning and they're pretty bullish on that and others that are, let's say, a little bit more conservative. You put it all together, it kind of looks like our top 25 clients that we've talked about. Some are up, some down. But for the most part, they're holding in really strong. I think that's attributed to the very diversified business that we built not only from clients but from the verticals. So some winners and some losers, we put it all together, and I think we're holding pretty strong.

Appreciate that. And I was wondering maybe if you could describe the pace of deal flow, which in your first part of your prepared remarks, I think you described it as improving. And maybe add to that a little bit of perspective on the contours of the pipeline for new logos. Thanks.

Sure. Yes. And that's an important part, as you know, of our business. Last quarter, I kind of shared that, hey, the pace is picking up, and we had some really large deals that are in play. I'm really delighted to announce that we're two for two on those very large deals, and we won four other deals. That's really the track record that my team and I have built here over the years. The first two quarters of the calendar year, our last two quarters of our fiscal year, started slowing and they started getting delayed in deals. I see that things are back to the pace that they were, with very large blue-chip deals and also what I think are some really new economy kind of disruptive brands. So we're getting excited about where this business is picking up again and how that trajectory looks in the back half of the year, but really into 2025.

And then I just wanted to ask a capital question about capital deployment, and I'll get back in the queue. Should we expect a similar pace of acquisition or, excuse me, share repurchase given the announced value that you said you execute over six months? And maybe if you could give us the parameters and thought process around how you're going to manage the balance sheet going forward, once that’s coming on and has been executed on, how low would you let cash go? Do you want cash to remain relatively stable even with the share repurchase? Thanks.

Yes. Taylor, why don't you take that?

Yes. No, absolutely. So, Tobey, we don't provide a forecast or guidance for our share repurchase. But what I can say is we certainly believe the valuations that our shares are trading right now are compelling. As you saw, once we announced the share repurchase program, we've repurchased over 400,000 shares for $6.7 million, and we have authorization for up to $30 million. We have over $20 million in availability to continue the repurchase program. Fortunately, if you look at our balance sheet, as you indicated, we have no debt. We have a very nice cash balance. We have positive cash flow. We balance all our capital allocation strategies. At this point, we don't have any debt to repay, and we aren't considering a dividend. So it's really our capital is going to be balanced between share repurchase, expanding capacity in targeted geographies, and then we're also, as Bob mentioned, open to targeted and opportunistic M&A opportunities if they come along. We would say that we are comfortable at our balance sheet, and obviously, where it is now, but we'd also be comfortable deploying some of the capital on these items, assuming we get the proper returns. We'll continue down that path but feel we're in very good shape from a balance sheet perspective.

If I could sneak in a follow-up there. With respect to targeted acquisitions, could you describe in the broadest parameters what kind of thing would fit? Is it geographic? Is it an industry? Is it some existing customer relationships? What would you want to extract from an acquisition like that?

Exactly. I think we'd be interested potentially in geographic expansion, in geographies where we aren't currently located to get a beachhead and then we can grow organically from there. I think also, we have strategic verticals, and if we saw an opportunity that was focused on one of our strategic verticals, I think that would interest us as well.

Thank you.

Yes. And Tobey, if I could just add. For the better part of my first seven, eight years here, we were heads down operating this business. Now that we've really transformed this business, we have this well-structured balance sheet and business model. We've now created a Corp Dev team that has a lot of pipeline that we are evaluating. Going back a year, we were kind of starting that process. We've been careful about it, but there are a lot of opportunities that we are having. The good news is, I think we have a sharp team that is looking at the right things, and if that comes across, we'll make that decision. Operator, are there any more questions?

Our next question comes from the line of Dave Koning of Baird. Your line is open.

Yes. Hey guys nice job, and can you hear me?

Sure can Dave. Yes.

All right. Good. Good. So I guess my first question, you're doing a nice job. This year is a little tougher growth-wise, but would you be growing better? Maybe how much headwind is the shift offshore? And how much is it in a normal year? Like is this year a 5% headwind from the shift offshore, but in a normal year might only be a couple of percent? Like how much of the headwind to revenue is this? I know that's good for margin, but just kind of talk through that?

Sure. The way to think about this, Dave, is the percentage of business that we now have in the near-shore and offshore regions, which increased 5% for our business. If you look at what's happened in the U.S., which is where that is extensively coming from, that's down sizably. So you can see the correlation of the U.S. down to the movements in other regions. That's the math that's there. What I like is that I think we've got a lot of that transformation or the move kind of behind us as we move into the second half of this year. I think once those things kind of level normalize, that will be a key driver for us, especially because that pipeline is picking up.

And Bob, I'll just add that in terms of the migration, it has contributed. We've had very nice gross margin improvement over the past year. It's gone from about 25% in the first quarter of 2023 to 29% this quarter. The shift to offshore has certainly helped us improve that gross margin along with operational improvements we've made in the U.S.

Got you. Thanks for that. As a follow-up question, you've had a lot of years where you've grown very well, right around 10% or so. In a normal year like that, how much of the growth is from existing and how much is from new? And then in a year like this, how does that change? Do you think you'll get back to normal by next year, maybe even late this year?

Yes. We're hoping that we can get – and again, the market is a little bit tough. Can we get into double-digit in the back half of the year, in Q4, or into 2025? I'm not quite sure we're there yet. But can we get into upper single digits? That's what we're hopeful for. If things keep progressing on the pipeline, we feel good about just how that trajectory adds up. If you look, our new logo revenue has ranged in the $30 million to $50 million in your revenue over the last three to four years. As we kind of move from a $400 to $500 million company, that adds up to strong growth for us. We think we're in a good position to have our business increasingly look like that down the road.

Got you. That's helpful. Great job on margins and cash flow, too.

Yes, we're excited about what we've done here structurally as a company that just – we're proud of that.

Yes. Great to see. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Matthew Roswell of RBC. Your line is open.

Yes. Congratulations on a nice quarter. I have three questions; sorry about that, all revolving around the large wins. First, you mentioned that they were very competitive. So can you talk about pricing and competition for those wins in general? Second part of the question is the analytics piece. Do you think that will become table stakes for winning new deals relatively soon? The final question for Taylor is, you had mentioned the ramp towards the back half of the year. How should we think about the seasonality of the revenues? Are they large enough to kind of move the needle?

Great. Thank you, Matt, for those questions and for joining. Let me take the first two, and then Taylor will respond to the third part. The large deals are very competitive; and again, think of the big multibillion-dollar players toe-to-toe in those. What both of them have in common, one was a near-shore deal and one was a provincial Philippine deal—was our ability to deliver generative AI solutions, particularly the smart IVR that includes chatbots and voicebots. We would not have won that without those capabilities. In fact, a year ago, that wouldn’t have been in anyone's decision-making process. Pricing is competitive, but we believe it's not about low pricing; it's about delivering exceptional value through advanced solutions. Our analytics need to be a central part of our offering, but firms must differentiate through the quality of those analytics, powered by AI, which we are well-positioned to offer. Taylor, you can provide insights on part three.

Yes. So, regarding revenue from Q1 to Q2, we are going to have a similar seasonal trend as we did last year, maybe just not quite as strong. Revenue from a Q2 perspective will be down slightly on a year-over-year basis. However, thanks to the wins Bob mentioned in Q1 and additional ones in Q2, we expect revenue ramping up so Q3 will probably be an inflection point on a year-over-year basis in terms of growth, and we anticipate a nice contribution to Q4 as well. On profitability, there will be a slight year-over-year decline in profitability in Q2 due to down revenue and our front-loaded training costs. But as the new deals ramp and those costs pass, you will see improved margins in Q3 and Q4.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Ryan Potter of Citi. Your line is open.

Hey, thanks for taking my question. Just to see the two deals that you mentioned in Q2 and some of it coming from your Gen AI capabilities. Could you give an update on where you stand with your planned investments and rollouts of Gen AI? What has client adoption been so far? Are we still in very early stages? Are most clients starting to ask for some Gen AI embedded into your current services? As for the cadence question, how do you expect AI to help you through the peak volumes, even in Q2?

Sure. Really good question, Ryan, and I appreciate that. Gen AI is early; yes, very, very early. We have over the last quarter revealed that we now have 15 opportunities evolving in that pipeline. Some are from embedded base clients, others are new wins. Clients are looking for multiple facets on how to deploy AI to improve cost effectiveness and enhance the customer experience. Gen AI isn't diminishing any client volume, but it does have the potential to enhance interactions by freeing up human resources for more complex tasks. As we progress through next year, expect solutions to be integrated more robustly as we prepare for peak seasons.

That's helpful. Can you comment on how much of the seat capacity is left to sell into? Are there certain geographies where you have more capacity? In terms of CapEx, how do you see it trending forward, will you require additional build-up?

Sure. Taylor, let me take the first part and then maybe you can elaborate on CapEx. Our offshore regions have seen aggressive growth, and the nearshore regions have been slower. We have ample capacity in the nearshore, and I'm excited about the large client win in Jamaica, while the Philippines is witnessing growth that might lead to new markets opening soon. Now, for CapEx, I think we've been conservative, but as the demand dictates, we can explore balanced CapEx going forward.

Yes, I agree. Our capital expenditures in Q1 were just above $2 million. We’ve projected $15 million to $20 million for the year, implying an acceleration of expenditures later in the year based on demand.

Got it. Thanks again.

Thank you. I'm showing no questions at this time. I'd like to turn the call back over to Bob Dechant, CEO, for any closing remarks.

Yes. Thanks, Valerie. Thank you all for listening to our earnings call. In closing, I just have to say this; we're really proud of what we've built here and have full confidence in where this business is going and our ability to deliver in the future. So, thank you all for listening, and we'll look forward to the next quarter. Thanks.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.